September 24, 2021
Want to Serve on a Board? 6 Observations for CFOs
Earlier this year, we met with finance leaders from a range of industries to discuss trends in board governance and composition. Specifically, finance leaders were interested in how the composition of U.S. boards is evolving and the director skills and qualifications boards are prioritizing.
S&P 500 boards increased their recruiting in 2020, adding 413 new directors. Boards are looking to increase their racial and ethnic diversity and to attract sitting CEOs, executives who have used technology to disrupt or reshape an industry, and those who have had success driving growth in key geographies, China and India chief among them.
Given these recruiting priorities, what are the opportunities for finance executives? CFOs and other financial executives who want to become directors on boards should understand the six boardroom trends affecting board composition today.
Changing backgrounds
One of the biggest long-term changes to corporate boards is that directors no longer have to have previous board or CEO experience. In fact, 65 percent came from outside the top executive ranks of CEO, chair/vice chair, president and COO, and 28 percent had no previous experience on boards, Spencer Stuart data show.
A decade and more ago, directors with board and CEO experience were among the most in-demand profiles. While boards still seek directors with these backgrounds, other expertise — including technology, digital and international — also are in demand.
Desired industries
About a quarter of recent new directors come from the technology sector, with another 14 percent coming from the consumer sector. Roughly 10 percent of new directors come from the financial services sector. Directors with technology backgrounds are in demand because of the emphasis on digital disruption, regardless of sector. Boards want directors who understand how digital technology affects business, something always in flux. There's also a perception that consumer executives have more exposure to some of these technologies, and some of connectivity to customers through digital platforms.
Succession planning
Nominating\governance chairs are increasingly focused on board succession planning, reflecting the realities of a changing business environment and current board composition. As current directors reach retirement age, and boards search for new directors with relevant skills and experience, they are bringing on younger directors who potentially have many years of board service ahead of them.
Turnover on boards is persistently low, with just over half of boards adding one or more new directors in 2020. Mandatory retirement is what typically drives turnover on S&P 500 boards, but the mandatory retirement age has risen to 75 years old on 46 percent of boards.
Modest turnover tends to correlate with good performance, while having too much turnover could threaten stability. While some boards can be slow to make changes in the boardroom, generally taking a view that they want stability on the board, a measured approach to making change serves shareholders and the company well by providing opportunities to inject needed skills and perspectives.
More meaningful board self-evaluation
In the past, some board self-evaluations have been a bit “check the box,” but boards have made significant strides toward more meaningful and rigorous self-assessment. Boards more regularly hire third parties to help collect and deliver individual feedback to board members and assess the board’s overall performance. Shareholders view this as a healthy practice for boards.
CFOs across industries represented
CFOs are good candidates for board service because of their financial experience, regardless of their industry expertise. All boards need financial experts for the audit committee. CFOs’ industry expertise can matter from an experience standpoint — where their skill sets will be most in demand — but typically does not affect their probability of being appointed to a board.
How new directors get on a board
The top two ways new directors find their way to a board are through recruitment and by knowing someone on the board. If you're thinking about joining a board, the most important things you can do to create opportunities for yourself is to activate your own network of board members and develop relationships with executive search firms.
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Financial executives will always be in demand on corporate boards, but those who will be best positioned for a board role will stay in tune with governance trends and expertise boards need.